Potential Unsubstantiation

By: ELA (Fri, Aug/24/2007)

The insurance industry tends to hold aloft any seemingly substantive document that enforces its opinion, without quibbling about any methodology criticism and public policy arguments raised by the conclusion. Two cases in point came to rise this summer — the Federal Trade Commission’s (FTC) report on credit-based insurance scoring and the Department of Homeland Security (DHS) study of National Flood Insurance Program claims following Hurricane Katrina. I guess the theory is that if you proclaim the good points loud enough, you drown out the bad.

After the FTC released its report, insurer trade groups leapt to praise its conclusions which said that credit scoring benefits consumers. Sort of. Maybe. Some of them, anyway. From the industry perspective, the great credit debate was over and another day in the data mines had ended happily.

Of course, it isn’t that simple. The FTC pointed out that some minority groups tend to have lower credit scores and therefore higher premiums than other groups. It is that type of statistic that doesn’t sit well with public policymakers. Accurate predictor of risk or not, it smacks of discrimination. It may not be much of an issue in most states, where credit scoring is already an acceptable underwriting tool, but it remains to be seen in Massachusetts, where “socioeconomic factor” is the legislative and regulatory buzzword of the moment and where insurers are eager to find out whether they can hit the credit button while underwriting post April 1, 2008.

And in the case of the DHS report on Katrina claims handling, federal investigators said they found no evidence that wind claims were improperly passed off as flood claims. Detractors say they just didn’t look hard enough and the report itself acknowledged that it “couldn’t rule out the possibility” that improprieties had occurred. They may have had more look if the Federal Emergency Management Agency which administers the National Flood Insurance Program (NFIP) had more of a clue how to operate.

At issue is the “Write Your Own” flood insurance program handled through insurers and their agents. Agents like the program because it gives them access to the NFIP and don’t want to see it jeopardized.

Regrettably, the DHS report leaves congressional dissenters like Rep. Gene Taylor (D-Miss.) all revved up and ready to start patching wind coverage onto the NFIP. It’s not a great idea and neither is the existing NFIP structure – but encouraging the government to be more creative at resolving the nation’s insurance woes could be disastrous, too.